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Regional Currency Areas in Financial Globalization

Regional Currency Areas in Financial Globalization

Edited by Patrick Artus, André Cartapanis and Florence Legros

This book is an up-to-date, authoritative and comprehensive analysis of the key issues and challenges facing regional currency area projects in the context of financial globalization. The authors focus on several central issues that emerged during the experiences of the 1990s and 2000s: exchange rate regimes and optimal currency area theory; exchange rate regimes in emerging countries, international capital markets and regional currency areas; EMU and the euro; exchange rate regimes in Central and Eastern Europe, Asia and Latin America; dollarization and the coordination of macroeconomic policies in the presence of regional currency areas.

Chapter 8: Regional Integration and the Issue of Choosing an Appropriate Exchange Rate Regime in Latin America

Hubert Escaith, Christian Ghymers and Rogerio Studart

Subjects: economics and finance, international economics, money and banking


Hubert Escaith, Christian Ghymers and Rogerio Studart* INTRODUCTION In the 1990s significant changes in macroeconomic policies and structural reforms in Latin America and the Caribbean (here after referred to as LAC) led to a convergence in macroeconomic policies, objectives and instruments, as well as a clear increase in the interdependencies of these national economies on both the trade and the financial fronts. In addition, as a result of financial globalization, economic events in one country produce direct impacts on financial spreads in the whole region. Despite this increased convergence of policy orientation and interdependency, macroeconomic policies are still uncoordinated and continue to be made in close-knit national circles without considering any spillovers at all. In particular there is a disturbing picture concerning national choices of exchange rate regime, characterized by two clear trends: (1) a general increase in the flexibility of exchange rates, that is a larger number of countries adopting floating schemes or widening the existing range for fluctuations; and (2) a significant polarization towards the corners of the range of possible systems: either pure floats or dollarization and currency boards. This chapter contends first that, due to external financial shocks and to the difficulties of sustaining coherent macroeconomic policies in the region, exchange rate regimes in Latin America tend also to be highly vulnerable; and that the adoption of ‘corner solutions’ does not solve these problems, but also tends to create even further macroeconomic imbalances and vulnerability. Second, we claim that even though Latin American...

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